J&J eyes options for OCD

By WILL ASTOR - 1/25/2013

Despite Johnson & Johnson's disclosure this week that it is considering a sale of Ortho-Clinical Diagnostics Inc., the J&J unit's employees can expect few changes and little disruption for the time being, Chairman and CEO Alex Gorsky promised.

Gorsky revealed during a fourth-quarter earnings call that J&J, based in Raritan, N.J., is considering "strategic options" that could include a divestiture of OCD. A spinoff of the $2.1 billion unit might also be considered, he said.

OCD, originally an Eastman Kodak Co. medical diagnostic unit producing Kodak-brand blood analyzers, ranked eighth on the Rochester Business Journal's most recent list of area manufacturers. Its local workforce of 1,130 people includes a number of well-paid scientists.

No sale of OCD is in the immediate future, Gorsky said. "It's a first step; we're in the very early stages," he told analysts.

For the time being, at least, Gorsky added, it would be "business as usual" for the company's employees.

Despite Gorsky's assurances, change could come to OCD relatively soon, said Brighton Securities president George Conboy. But that might not be bad for the unit or its workers, he added.

A relatively small pool of buyers would be interested in acquiring the J&J unit, Conboy said. AbbVie Inc., a pharmaceutical company recently spun off by Abbot Laboratories Inc., would be one example.

The $4.8 billion AbbVie might be in a queue of prospective OCD buyers, Conboy said. But whether it is or not, a handful of firms that roughly fit its profile-pharmaceutical or medical-surgical companies with billions of dollars in sales but much smaller than the $67.2 billion J&J-could see OCD as a valuable property.

While OCD is well-run and relatively successful in its field, its performance is short of the market dominance that big firms such as J&J want to see in their units, Conboy said.

Explaining the divestiture plan to analysts this week, Gorsky said as much.

"When we looked at (OCD), what we see is a business with many very good technologies," Gorsky told the analysts. "We also saw a business that did not have a No. 1 or No. 2 position within their respective marketplaces. While we certainly believe in the future of diagnostics, we think that that will more likely be in an area outside of clinical diagnostics such as molecular diagnostics, biomarkers, some of the other things that we're already working on with some of our oncology programs."

In a Jan. 22 investor presentation, Karen Licatra, worldwide chairman of J&J's Global Medical Solutions division, which includes OCD, said an important strength of the company and her division is that "we play in large markets with healthy growth rates."

Ticking off market shares of the division's units, Licatra said OCD has the top share in the immune-screening market but is No. 2 and No. 5 respectively in its other two key markets, donor screening and in vitro diagnostics.

Those market shares would not be disdained by the midsize buyers he sees as potential OCD suitors, Conboy said.

Licatra also described "unique proprietary technology" currently in OCD's research and development pipeline that could be attractive to the buyers Conboy envisions.

Currently in early stages of development, such technology ultimately could be applied in point-of-care diagnostic testing equipment that would let medical personnel get lab-quality results in places such as hospital rooms or doctors' offices, Licatra said.

Despite Gorsky's pains to portray a divestiture of OCD as a probably distant event, Conboy believes a deal could come together fairly soon. Before publicly disclosing its intention to sell OCD, J&J would have made a thorough study of the market, he said.

And given what he believes to be a small field of likely buyers, "I wouldn't be surprised if they aren't already talking to a few prospects and have a pretty good idea of who might be a buyer," Conboy added.

An announcement of a deal could come in as little as 90 days with a closing before the end of this year, he predicted.

Conboy sees such a sale as the most likely outcome of J&J's strategic-option explorations. A spinoff would not be out of the question, but a sale would be less complicated and easier for J&J to manage.

A sale to a private equity buyer also could happen, Conboy said. But OCD is in good shape and has good prospects. Private equity investors, who generally look for the corporate equivalent of fixer-uppers, would be less likely to see it as attractive than would companies looking to grow with the acquisition of a turnkey unit.